Venezuela's election and PetroCaribe

By Professor Anthony Bryan

In the past few weeks there has been a lot of speculation in the Caricom and regional media about whether the PetroCaribe programme will survive without President Hugo Chavez.

The informal consensus is that the programme will not be terminated abruptly under the administration of acting President Nicolas Maduro.

And, if he is elected president, the programme could have a long shelf life.

Further, consensus is that if opposition leader Henrique Capriles was elected to the presidency, the programme would be re-evaluated and progressively phased out.

At this stage the outcome is like a slow roll of the dice.

But the issue is bigger than PetroCaribe.

Fuel and diplomacy

What is really at stake is the future of Venezuela’s current global resource diplomacy, as practised by Chavez, the ability of the Venezuelan state to maintain it, and whether politics or economic will decide its fate.

Since its inception in 2005, PetroCaribe has provided 18 Caribbean and Central American member countries with cheaply-financed Venezuelan oil and infrastructure projects.

A quick snapshot of the largest regional beneficiaries of Venezuelan resource diplomacy is instructive. Under a separate supply agreement with Venezuela, Cuba receives about 115,000 barrels of oil per day to meet half of its consumption needs.

The arrangement is worth about US$3.2bn a year.

It also receives billions of dollars in infrastructure investment from Venezuela. Nicaragua receives almost all of its 12 million barrels a year from Caracas, worth about US$1.2bn.

The Dominican Republic gets more than 40% of its oil through PetroCaribe, estimated to be worth about US$600m in 2012.

Jamaica receives 22,000 barrels of oil per day, roughly two-thirds of its crude demands, through PetroCaribe.

It has used the Venezuelan oil it receives daily to produce 95% of its electricity.

The impact of PetroCaribe has been very dramatic.

Since its inception, the financing mechanism is estimated to have saved members more than US$1bn in financing energy costs.

In essence, the programme saved several regional economies from certain collapse. But while the programme has provided short-term relief, it has also become an addiction for its beneficiaries.

Venezuela is today the largest creditor for PetroCaribe members.

The programme has also contributed to the unsustainable debt accumulation in some of the countries.

Given the phenomenal high debt to gross domestic product (GDP) ratio of some Caribbean members of PetroCaribe, loss of the programme could spell serious economic distress.

According to the International Monetary Fund (2011), St Kitts/Nevis has the highest debt to GDP ratio in the Caribbean at a staggering 156% of GDP, followed by Jamaica at 126%, while Grenada is at 99% and Dominica at 78%.

Their economies could be unsustainable without new dramatic sources of revenue and energy supply at favourable cost.

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Cuba would face an economic crisis and have to struggle to find comparable funding sources. Most Cubans can still recall the “Special Period” of the 1990s when the sudden collapse of the USSR plunged the island into years of economic depression.

Venezuela replaced much of the financing gap left by the former Soviet Union and Chavez’ resource diplomacy contributed to return Cuba to stable economic function.

The Dominican Republic, which has a very strong and diversified economy, will survive the dislocation.

But the government will still have to scramble to find resources to replace the US$600m in support that the PetroCaribe programme provided in 2012.

The Medina administration will have to seek financing either by concluding a new IMF agreement or tapping domestic financial markets or turning to international creditors.

For Nicaragua, a reduction or elimination of Venezuelan assistance would demand serious economic and social adjustments.

According to some estimates, the various facets of Venezuelan support are equivalent to seven to eight per cent of Nicaragua’s total GDP (US$600m a year).

The Nicaraguan Foundation for Economic and Social Development (FUNIDES) recently estimated that a partial or total reduction of assistance from Venezuela would result in a one to three percentage points drop in the growth of Nicaragua’s GDP.

The country would have to seek additional help from multilateral donors.

La Prensa, Nicaragua’s leading newspaper noted, in an editorial that Ortega has been trying to bolster economic reserves, and raised taxes in January 2012 apparently in anticipation of a reduction in Venezuelan aid.

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A Venezuelan reality check

First, according to available data, Venezuela shipped around 200,000 bpd to PetroCaribe members in 2011. Together, analysts estimate that these programmes account for an estimated US$20bn in lost revenue per year (equivalent to 6.5% of GDP).

When the separate supply agreements with Cuba and with China are factored in, some global industry reports indicate that these preferential supply agreements cost Venezuela revenue lost equivalent to more than 400,000 barrels per day (bbl/d) of Venezuelan oil exports.

Second, Venezuela is currently giving away around one third of its oil production at below-market prices.

This includes loans-for-oil deals with China, and heavy subsidies in the domestic energy market (which consume more than 8,000 bpd, according to industry analysts).

Third, energy analysts forecast that the Venezuelan oil sector is unlikely to improve significantly in the near term regardless of the outcome of the political transition.

A Maduro administration would likely represent policy continuity, and government demands on the state-owned oil company PDVSA for revenue will remain strong.

With a change of government energy policy might be different, but it will still be influenced for sometime by the prevailing state apparatus that includes PDVSA.

Fourth, the Venezuelan economy is in serious trouble. Inflation is in the high 30s, (while the Latin American average is 7%), the national debt is rising, and the fiscal deficit is growing.

Politics or economics?

Venezuela’s present economic realities would indicate a reduction in the largesse that accompanies current resource diplomacy as designed and implemented by the late President Hugo Chávez.

Further, given the potential for future regime change in Venezuela, and questions about PDVSA’s performance, aid programmes in their current form could be revised, or even phased out.

The sustainability of PetroCaribe and similar aid programmes depends on several factors. Some energy specialists estimate that if oil prices ever go below US$75, Venezuela will not be able to maintain the programme.

The reality is that at some point neither PetroCaribe nor ALBA, nor any other Venezuelan aid programs, will be able to deliver the same level of benefits.

However, politics often seems to trump economics!

So with politics it is not at all certain that Venezuela’s current resource diplomacy initiatives would be cut drastically, and certainly not immediately; even by an opposition government that would want to continue good relations in the Caribbean and Central American region.

However, if economics rather than politics prevails, the initiatives will be phased out sooner rather than later.

Forecast

A President Maduro will most likely maintain PetroCaribe.

But domestic fiscal constraints will force his administration to reduce foreign aid.

In this scenario, maintaining aid to Cuba would be a priority since the Castro brothers are strategic allies.

A strong relation with the Castro regime is also Maduro’s main path to justify his revolutionary credentials in the post-Chávez era.

For other member countries, including those in Caricom, any reduction in aid would be gradual, but more substantial.

The dismantling of PetroCaribe and other Venezuelan aid programmes would significantly affect Nicaragua, the Dominican Republic and Jamaica and force their leaders to undertake tough policy adjustments.

Prof Anthony T Bryan consults on energy geopolitics and energy security for US-based political and economic risk firms. He also writes frequently for international energy and business publications. He is currently a senior fellow at the Institute of International Relations of the University of the West Indies, St Augustine.